Business Valuation for Divorce Purposes

 Posted on May 19, 2017 in Division of Assets

Asset division is by far the most complex part of divorce for many people, and this is only magnified if a family business is involved. In order to get an accurate estimation of a business’s value for purposes of the marital estate, professionals are often utilized. Even after a value is obtained, however, the business can still be a cause of disagreement.

Different Approaches to Valuation

Depending on the nature of the business, its actual worth may be determined by using one of three different methods. The first is simply listing all available assets, including those of physical and intellectual nature and personnel. This is the best approach for companies that are very young—usually those just barely making a profit. The second is the market approach, which is most often used by valuation professionals and involves estimating the future earning potential of a company by its place in the market. The third is referred to as income valuation, and it involves estimating future potential and then adjusting downward to arrive at current values.

A business valuation expert such as an appraiser or Certified Public Accountant can help you determine which approach is most appropriate for your business and your situation. A trained professional is best equipped to fairly and accurately assess the value of the business, and he or she will also have full access to all the relevant information. It is sadly common for one spouse to hide information from the other during a hostile divorce, especially if that spouse is more involved with the business than the other, but a professional can usually see through such deceit.

The Issue of Goodwill

One question that can make a valuation more complex is the issue of personal and professional goodwill as a business asset. Professional goodwill is loosely defined as the value of the benefits that buyers obtain when they purchase a business, such as local knowledge, experienced workers, and an established brand. This is different from personal goodwill, which speaks more to a worker or owner’s ability to run their business, and is not an asset that can easily be assigned a dollar value.

Illinois case law has addressed the issue of personal goodwill as an asset. The Illinois Supreme Court went out of its way in In re Marriage of Talty (1995) to specify that while enterprise or professional goodwill can outlast one person’s individual involvement in a business, personal goodwill follows a person, and will usually not remain with the company once that person has ceased to be affiliated with it. Thus, if a business is to be sold, a discount may be assessed for personal goodwill, but not for professional goodwill, as it goes along with the business.

Consult an Asset Division Attorney

Having an accurate valuation of your family business is integral to ensuring asset division in your divorce is truly fair and equitable. Contact an experienced DuPage County property division attorney at Pesce Law Group, P.C. to discuss your options today. Call 630-352-2240 for a free, no-obligation consultation with a member of our knowledgeable team.

Sources:

http://www.forbes.com/2009/09/23/small-business-valuation-entrepreneurs-finance-zwilling.html

https://www.courtlistener.com/opinion/2135962/in-re-marriage-of-talty/